Category Archives: Investor Beware

As reported by The Wall Street Journal on December 15, 2015 (“Investors Abandon Risky Funds”), the U.S. High-Yield bond rout has deepened this week, with the bonds of dozens of low-rated companies falling anew and the shares of some large fund-management firms tumbling as well.

Investors retreated from the U.S. junk-bond market for the third straight trading day and stocks of large asset managers were hit by heavy selling, a sign that the deepest turmoil in financial markets since summer is intensifying. Some investors reported difficulties selling lower-rated bonds quickly or at listed prices, though others said the market appeared to stabilize somewhat after the record plunge in prices on Friday.

While the market for the highest-quality bonds remains intact, there are signs across Wall Street that investors are losing confidence in lower-quality bonds and the firms that most actively deal in them.

Waddell & Reed Financial Inc., which manages the $6.2 billion Ivy High Income Fund, has suffered the largest outflows this year of any junk-bond fund. According to Morningstar, investors withdrew $1.8 billion from the fund this year through November, the highest level of any high-yield bond fund during that period. The Ivy High Income Fund is among the worst high-yield performers this year, according to Morningstar. The fund is down 6.4% this year through last Friday.

AllianceBernstein Holding LP, which runs the $5.8 billion AB High Income Advisor fund, dropped 7% and Affiliated Managers Group Inc., a major investor in Third Avenue Management LLC, which last week suspended withdrawals at its junk-bond fund, dropped 5.7%.

If you are an individual or institutional investor who has any concerns about your investment in high-yield bond funds, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

As reported by Bloomberg on December 13, 2015 (“Investors See Third Avenue Fueling More Bond Market Carnage”), “top bond managers are predicting more carnage for high-yield investors amid a market rout that forced at least three credit funds in the past week to wind down.”

The three bond funds that suffered losses within the past week include the Third Avenue Focused Credit Fund (which has announced the suspension of investor redemptions from its $788.5 million mutual fund), Stone Lion Capital Partners (which has announced the similar suspension of investor redemptions from its $400 million fund) and Lucidus Capital Partners (which has announced the liquidation of its $900 million portfolio).

Some Wall Street experts, including Jeffrey Gundlach, Carl Icahn, Bill Gross and Wilbur Ross, are predicting that an increasing percentage of high-yield funds may face a high level of withdrawal requests as more and more investors become concerned about the ability to get their funds back.

The root of the problem facing many high-yield funds appears to be the valuations of the securities that are held in their portfolios – securities that are valued based on the estimates of their portfolio managers that have no basis in fact or reality when those securities are later attempted to be sold. This forces a fire-sale of the securities at prices that are significantly below what they are being carried on the books of the funds at which then leads to the inability of those funds to meet investor redemption requests.

If you are an individual or institutional investor who has any concerns about your investment in the high-yield bond funds, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

A firm originally founded by investor Martin Whitman has announced that it is barring investor withdrawals while it attempts to liquidate its high-yield bond fund, an unusual move that highlights the severity of the months-long junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive their money back for months, if not more.

Third Avenue Management, in a letter to investors dated December 9, 2015, said that investor redemption requests, coupled with the general reduction of liquidity in the fixed income markets, have made it “impracticable” for the Third Avenue Focused Credit Fund to honor requests for those investors who want their money back.

The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year.

If you are an individual or institutional investor who has any concerns about your investment in the Third Avenue Focused Credit Fund, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Recently, Exchange-Traded Funds are being perceived as scary to many in the investment world. Some financial advisers say they are now guarded about recommending the products to clients. Lots of questions arose about the products’ trading and marketing in the days following the Aug. 24 “flash crash,” when prices of several ETFs appeared to come unbalanced from their primary value.

According to the Wall Street Journal, for those looking to practice “safe ETF,” here are five questions to consider:

1. Do ETF investors have enough safeguards?

There are plenty of consumer-protection regulations surrounding ETFs, but that doesn’t mean the rules are airtight.

Initially created to track indexes, ETFs are similar to mutual funds in that they mostly consist of baskets of stocks and bonds, but they are different in that they trade on exchanges all day like stocks.

Because of ETFs’ hybrid nature—and because there is no separate “ETF law”—they are governed partly by the Investment Company Act of 1940, which sets rules for mutual funds, and partly by the Securities Exchange Act of 1934, which sets rules for brokers and exchange oversight.

The problem is, neither law was designed to account for a product that relies on second-by-second pricing of both itself and a collection of other securities. As Aug. 24 showed, ETFs in rough markets can fall harder than the prices of their underlying assets. In normal markets, ETF traders who profit from zooming in and out of the ETFs and their underlying holdings keep the values in line, but investors have been startled to see that balance can be disrupted at times.

ETFs are a “digital-age technology” governed by “Depression-era legislation,” analysts at fund-tracker Morningstar have said.

Exchanges, as well as some fund providers, are examining how to prevent these rare trading anomalies. Meanwhile, the risk that ETFs may not always trade or price as expected is one that investors need to consider.

2. Everyone is doing it. Do I need to be invested in ETFs?

You don’t need ETFs any more than you need to buy the latest iPhone. One reason investors have poured money into ETFs is their tax efficiency and typically low fees (which is possible because 93% of the products track indexes with low turnover, according to researcher XTF Inc., which is what keeps down transaction costs and realized capital gains).

However, ETFs aren’t the only game in town when it comes to low-cost investing. In certain asset classes, index-tracking mutual funds can be just as cheap as comparable ETFs. What’s more, while ETFs are known for their tax efficiency, that may not be of great importance to everyone, especially those who don’t plan to hold the funds in taxable accounts.

What matters most—and what investors should focus on—is whether a fund’s underlying portfolio fits with their goals, says Rick Ferri, the founder of Portfolio Solutions and long a proponent of index investing. “Look under the hood,” he advises, because many funds that seem similar really aren’t and will produce very different results. From there, investors can assess the product’s structure and whether the costs involved in holding or trading it are a good fit for them.

For some people, ETFs’ intraday tradability is a strong selling point. Unlike mutual funds, which can be bought or sold only at each day’s closing net asset value (NAV), ETFs can be traded all day on exchanges, which usually makes it easier for investors to get into or out of positions at a market price quickly (except, of course, on days like Aug. 24). “How important is that to you?” Mr. Ferri asks.

Others like ETFs because they offer a way to get low-cost exposure to corners of the market that used to be inaccessible to most individual investors.

“ETFs have democratized access to a broad array of asset classes,” says Onur Erzan, director of McKinsey & Co.’s North American asset-management practice. “This has improved the ability of investors and advisers to construct more granular and efficient portfolios,” he says. These include specific segments of the government and corporate debt markets, including high-yield securities (junk bonds) and bank loans, as well as hard-to-reach economies such as China, India and other developing markets, domestic and international sectors and industries, and socially responsible themes. On top of these, some asset managers offer currency hedging within the ETF and leveraged or short daily exposure geared more toward professional traders.

3. What happened in August and could it happen again?

Critics say stock-market swings on Aug. 24 exposed the flaws in ETFs they have been warning about for years. Proponents say ETFs mostly were caught in the crossfire of marketwide trading issues that had little to do with them. One thing is for sure: It wasn’t the first time ETFs have surprised investors.

ETFs were in focus during the flash crash of 2010, in which bids on dozens of ETFs (and other stocks) fell as low as a penny a share, and again in 2013, when municipal-bond ETFs traded at a discount to their net asset values during the “taper tantrum,” when bond yields jumped.

And then came Aug. 24. The debacle was a test for the labyrinth of new regulations put in place after the 2010 flash crash, and it wasn’t pretty. As the Dow Jones Industrial Average plunged 1,000 points, triggers went off for mandated halts in many stocks held by ETFs, as well as the ETFs themselves. Then, a number of ETFs stunned investors by trading at prices far below their NAV, highlighting concerns that ETFs might not be as easy to move in and out of at “fair” prices when markets are in disarray.

In response to the Aug. 24 debacle, the three U.S. listing exchanges—the New York Stock Exchange, ICE -0.85 % Nasdaq Stock Market NDAQ -0.58 % and BATS Global Markets Inc.—indicated they will no longer accept stop-loss orders on any traded securities. Such orders seem to protect investors by triggering a sale when a target price is met, but at a certain point in a falling market they become “market orders” that are completed at any price. The NYSE is considering a way to flag “aberrant” ETF trades.

Meanwhile, it may be more advisable than ever for investors to use limit orders—orders to buy or sell a security at a specific price or better, literally putting a limit on how low the price can go.

“Have good trading hygiene,” says Dave Nadig, director of ETFs for FactSet. “The vast majority of ETFs deliver on their core promise to investors. But if you trade them poorly, that’s probably on you.”

4. What parts of the ETF market should I be most wary of?

Investors should be wary of “any area where there’s a lot of product development,” Mr. Nadig says.

Regulatory issues aside, the “safety” of any financial product largely depends on how well an investor understands it, and in this regard, the ETF ecosystem has grown more complicated in recent years.

The idea behind the earliest index-tracking ETFs was pretty simple: provide investors with market-cap-weighted exposure to entire markets or giant chunks of markets at the lowest possible cost.

Since then, ETF offerings have proliferated. Anyone with a brokerage account can now choose from among more than 1,800 different exchange-traded products, covering almost every conceivable market sector, niche and trading strategy. While some advisers love that—it gives them an easy, low-cost way to provide clients with exposure to certain market segments—the concern is that some less-sophisticated investors may be buying complex, heavily marketed funds without fully understanding what they are getting.

“ ‘Smart beta,’ in particular, creates real due-diligence problems,” Mr. Nadig says, referring to the growth in index products that shun traditional market-cap weightings and instead weight holdings according to an investment factor such as volatility, value, quality or momentum.

“With some new factor-based ETFs, it can be very hard to really understand what you are getting and why,” says Mr. Nadig. It requires understanding how the fund is segmenting securities based on a factor such as value, how it is weighting stocks in the portfolio, how often its index is rebalanced, and whether there are stock or sector limitations or weights.

If you don’t have the knowledge or time to build and manage a complex portfolio, it may be best to stick with broad-based index ETFs with significant assets and trading volume, experts say, and leave the niches to the pros.

5. Where do ETFs go from here?

Even as ETFs continue to surge in popularity, gobbling up $200 billion in investors’ dollars so far this year, their emerging dominance in the passive-investing world is already being challenged.

Online broker Motif Investing, for example, offers low-cost direct investing in baskets of up to 30 stocks tied to investment themes, industries and sectors. It charges only $9.95 per “motif” trade or rebalance order.

Among “robo advisers,” which are automated investing services, Wealthfront now offers direct indexing for clients with more than $100,000. Instead of using an ETF, Wealthfront will buy anywhere from 100 to 1,000 individual stocks, proportional to their share in Standard & Poor’s market-cap-weighted U.S. indexes, and harvest tax losses at the individual security level. The company charges 0.25% of assets annually manages the first $10,000 free.

Traditional mutual-fund managers, meanwhile, are looking to ride a new investment vehicle developed by a unit of Eaton Vance EV -2.88 % —an exchange-traded managed fund that will trade all day like a stock but won’t have to fully disclose its portfolio like other actively managed ETFs—to sustain interest in their investment strategies. Similarly, other issuers of index ETFs, including BlackRock, State Street Corp. STT -2.08 % ’s State Street Global Advisors and Vanguard Group, are looking at ways to reintroduce ETF-inclined investors to active strategies.

“Investors will ultimately embrace them only if they are convinced of the incremental value versus some of the technicalities,” says McKinsey’s Mr. Erzan.

So far, it has all been a tough sell.

FINRA has notified MetLife that it is recommending disciplinary action due to its sales of variable annuities. FINRA’s  concerns include misrepresentations, unsuitable investments, and supervision in connection with the sales and replacements of variable annuities and certain riders associated with them. Please contact us if you have any questions or concerns about your purchase of MetLife variable annuities.

Oil and gas investment scams are alive and well. High oil prices have created a heightened interest in investments in energy-related business ventures. Most oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices.

Although some of the con artists moved on to more lucrative venues since the oil boom ended in the mid-1980s, many continued to linger on in the oil field. Now with the constant fluctuation of oil prices, some of these people have made their way back to these kinds of scams. When there is a highly publicized economic circumstance, which creates an opportunity for money to be made legitimately, scamsters follow in the shadows to take advantage of the situation.

Oil and gas investments take many forms, including limited partnership interests, ownership of fractional undivided interests in leases, and general partnerships. Tax consequences and investor participation vary according to the type of program.

In a drilling limited partnership, an oil or gas company sells partnership units to investors and uses the money it raises to lease property and drill wells. In return for managing the project, the sponsor company usually takes an upfront fee that averages about 15-16% of one’s investment (commonly referred to as tangible and intangible drilling costs) and also shares in a percentage of any revenue generated. In return, the promoter offers the investor the prospect of a substantial first year tax write-off and potential quarterly cash distributions from the sale of any oil and gas the partnership finds until the wells run dry.

Drilling partnerships have always been a gamble, but recently, they have proven somewhat riskier than usual. This type of investment is very speculative, is a highly illiquid investment and can have a long holding period.

Fraudulent oil and gas deals are frequently structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. Thus there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for law enforcement officials and victims to identify and expose the fraud.

In order to attract the interest of potential investors, unprincipled promoters frequently use the Internet and “boiler room” offices with banks of phones manned by salespeople with little or no background in energy exploration, but plenty of experience in high-pressure sales. Their techniques include repeated unsolicited phone calls to members of the public, hyping the profitability of the deal. Some swindlers use professionally designed brochures.

Some of the following claims are common in a typical high-pressure sales pitch, whether through unsolicited telephone calls or e-mail messages:

• You will have an interest in a well that cannot miss;
• The risks are minimal;
• A geologist has given the salesperson a tip;
• The salesperson has personally invested in the venture;
• The promoter has “hit” on every well drilled so far;
• There has been a tremendous “discovery” in an adjacent field;
• A large, reputable oil company is operating or planning to operate in the area;
• Only a few interests remain to be sold and you should immediately send in your money in order to assure the purchase of an interest;
• This is a special private deal open only to a lucky chosen few investors.

If you receive an unsolicited telephone call about an oil and gas investment, the first critical step that you should do is to call your state securities regulator and check on the investment opportunity, the salesperson and the promoter.

If you are an individual or institutional investor who has any concerns about an oil and gas investment having been purchased in your individual and/or retirement account, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Oil and Gas Terms

Crude Oil: Crude oil is, quite simply, oil in its natural state. It is what is extracted from the ground. Often described as the world’s most important commodity, crude oil is what refineries use to make products such as gas, diesel fuel and kerosene.

Crude oil can be categorized as “light,” “heavy,” “sweet” and “sour.” The latter two are a nod to the days when oil prospectors would actually taste oil to get a sense of its composition. Crude oil that contained less sulfur was considered sweet, while oil with more sulfur tasted sour. Light crude oil has a lower density than heavy crude oil. Light, sweet crude oil is the easiest and cheapest to refine into gasoline and diesel fuel.

Hydraulic Fracturing: Hydraulic fracturing, otherwise known as fracking, has gotten a lot of attention over the last eight years, but the technique has actually been in use since the 1940s. Fracking itself involves pumping water, sand and chemicals into a well to create fractures in rocks that then release crude oil as well as other petroleum products and/or natural gas.

Shale Oil: While hydraulic fracturing has been around for a long time, the recent development of horizontal drilling has allowed U.S. companies to pull oil and natural gas out of previously hard-to-reach shale beds. The new mining technique, which involves angling drill bits to blast through rock horizontally, allows energy companies to tap a much greater underground area for energy resources. With oil being drawn from new shale fields, U.S. crude oil production has soared, reducing U.S. demand for foreign countries’ oil exports.

Oil Sands: These may sound like beaches, but they’re really mixtures of sand, clay, water, and bitumen, which is so viscous that it appears solid at a temperature of 50 degrees Fahrenheit. Some oil from the sands is recovered using the kind of open-pit methods that wouldn’t be out of place in an iron ore mine. In other cases, companies drill horizontal wells and pump steam into the ground to heat the bituminous oil, which in turn allows it to be pumped to the surface. The world’s largest oil sands are in Alberta, Canada.

Barrel (bbl): A unit of volume holding 42 U.S. gallons. Crude oil prices are listed per barrel or bbl — for example, $45/bbl — on commodities exchanges.

Organization of the Petroleum Exporting Countries (OPEC): OPEC is a group of 12 countries that produce about 40 percent of the world’s crude oil. Established in the early 1960s with Saudi Arabia, Iran, Iraq, Kuwait and Venezuela as its founding members, OPEC sought to coordinate oil production and export policies to gain greater influence over oil prices and supply.

The Benchmarks

West Texas Intermediate (WTI): West Texas Intermediate is a light, sweet crude oil produced in the U.S. and delivered to Cushing, Oklahoma, which is the country’s largest oil storage hub and the price settlement point for WTI. It is the oil underlying the New York Mercantile Exchange’s (see below) oil futures contracts.

North Sea Brent: Brent crude oil is oil that comes from the North Sea. The price of Brent crude is used to benchmark the price of most oil. Though it’s considered a sweet crude oil, it is more sour than West Texas Intermediate. It trades on the ICE Futures Europe exchange (see below).

Dubai and Oman Crude: The average price of oil from Dubai and Oman, which both produce sour crude, is used to create a third major oil benchmark that helps to price Middle Eastern crude oil that is exported to Asian markets.

OPEC Basket: The OPEC basket is a benchmark derived from the prices of crude oil produced in OPEC member countries. It’s a weighted average of those prices, which includes blends such as Arab Light of Saudi Arabia, Merey of Venezuela and Bonny Light of Nigeria.

The Exchanges

New York Mercantile Exchange (NYMEX): The New York Mercantile Exchange, part of the larger CME Group, is the world’s largest physical commodities futures exchange. Based in Manhattan, NYMEX is home to the trading of futures and options on energy-based commodities, including oil and natural gas contracts, as well as metals.

Intercontinental Exchange (ICE): The Intercontinental Exchange is a network of exchanges that include all-electronic commodities futures markets such as ICE Futures U.S. and ICE Futures Europe. ICE also owns the New York Stock Exchange, which it purchased in 2013.

Oil and Gas Business

Master Limited Partnerships (MLPs): Master limited partnerships are publically-traded investment vehicles that pay quarterly distributions to shareholders. MLPs are often used to raise capital to develop infrastructure in the oil and gas sector including pipelines and storage facilities. Unlike corporations, MLPs are taxed as partnerships, offering potential tax advantages to investors.

Offshore Drilling: Offshore drilling refers to the extraction of oil and natural gas from wells drilled into the ocean floor. Under the International Law of the Sea, the area stretching 200 miles from a country’s coastlines is called the Exclusive Economic Zone. Energy companies lease parts of the EEZ from governments for energy development, which is more costly than drilling on land.

Early efforts at offshore drilling were confined to areas with ocean depths of less than 300 feet, but today, wells can be drilled to depths of 10,000 feet or more through floating platforms. In 2013, offshore drilling accounted for some 18 percent of U.S. crude oil production.

Upstream, Midstream and Downstream: These are the three primary categories of activity in the oil industry, and you may hear companies being referred to as “upstream”, “midstream” or “downstream”.

Upstream: Upstream operations are also often called exploration and production companies, or E&P companies. Upstream companies are involved in searching for and locating new oil sources and actually extracting oil from the ground.

Midstream: Extracting oil from the ground (or seabed) is only the first step in its journey to an end-user. Companies that store and transport crude oil from wells to refineries make up the so-called midstream in energy production.

Downstream: In the oil business, the downstream encompasses everything that happens to crude oil after it hits a refinery. Refineries, one of the most important downstream segments, process crude oil into usable petroleum products such as gasoline. Transportation is another important segment – refined products find their way to the companies that will sell them to end-users via pipelines, railways, trucks, and ships. Finally, the downstream also includes the companies that make final sales of refined products, including wholesalers and retail gas stations.

Integrated Companies: Vertically integrated companies that take care of upstream, midstream, and downstream operations all under one roof are known as integrated oil companies.

As reported by the New York Times on September 30, 2015 (“Risky Strategy Sinks Small Hedge Fund”), the Spruce Alpha LP Fund, a Stamford, Connecticut based hedge fund which had been pitched to investors as offering large returns in periods of market turbulence, lost 48% of its value during the month of August 2015.

Spruce Alpha, managed by Spruce Investment Advisors, was launched about a year ago and reportedly used a complex and controversial trading strategy that involved derivatives to amplify returns from trading in exchange-traded funds, or E.T.F.s, of various strategies.

“To sell the fledgling fund to investors, Spruce emphasized not only an outsize hypothetical performance going back as far as 2006,” but according to documents reviewed by the New York Times, the fund’s back-testing projections in documents provided to potential investors indicated that “at the height of the 2008 financial crisis, investors would have had a gain of more than 600 percent.”

As noted by the New York Times, “for the investors who have lost nearly half of their investment, however, it is a cautionary tale of relying on glowing, but backdated, performance data. Back-tested results in hedge fund marketing materials have long drawn scorn from some in the hedge fund world. The results are typically recreated with the benefit of hindsight, making it easier for a fund to post hypothetical good results.”

If you are an individual or institutional investor who has any concerns about your investment in the Spruce Alpha LP Fund, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

A reported in a recent blog posting by the Securities Litigation & Consulting Group, (“The Recent Market Turmoil Spells Trouble for ‘Auto-Liquidators’ like Interactive Brokers”), brokerage firms that require their clients to agree to the automatic liquidation of positions when their accounts are in a margin deficit face renewed questions after the wild stock-market gyrations in August and September exposed severe cracks that some critics had warned about for months.

It is estimated that recent sharp market drops may have caused hundreds of accounts at auto-liquidating firms, such as Interactive Brokers, to be severely damaged by faulty algorithms – the computerized programs that select which securities will be sold and the timing of those sales. As noted in the blog posting, “poorly designed algorithms can execute trades that have no hope of efficiently alleviating a margin deficit and actually can convert a curable margin deficit into a death spiral liquidation.”

The accounts that would appear to be most at risk for this issue are those which hold thinly traded stocks and certain stock index options.

“Auto-liquidation algorithms fail when they liquidate thinly traded positions with large bid ask spreads. The margin deficit is calculated based in part on values at or inside the bid ask spread. If the liquidating trades are executed at prices equal to the prices used to value the portfolio the customers’ equity remains the same, the margin requirement is lowered and the deficiency is reduced. Poorly designed algorithms may execute trades at or above the ‘bid’ when closing a short position and at or below the ‘ask’ when closing a long position. When this happens, the customer’s equity is reduced by the liquidating trades which may worsen rather than improve the margin deficiency. Some of these accounts will be converted from an equity position to a debit position in milliseconds because of the faulty algorithm without any change in the value of the portfolio holdings.”

If you are an individual or institutional investor who has any concerns about positions in your account having been automatically liquidated in the past few months, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

LPL Financial Holdings Inc. will pay more than $3.4 million to settle two separate regulatory probes into how the brokerage sold certain complex investment products.

In one instance, the Boston-based firm must pay $2 million to settle allegations by the Massachusetts Attorney General’s Office and the Delaware Justice Department stating LPL failed to supervise its financial advisers who caused clients to hold ETFs for extended periods. Leveraged ETFs are typically designed to deliver a multiple of an index’s performance each day, but results over longer periods can be far different from what the daily objective might suggest.

According to LPL spokesman, “LPL will make enhancements to its oversight of leveraged ETFs including implementation of a renewed training and monitoring program to ensure the proper and effective use of leveraged ETFs as part of investors’ overall financial plans”.

The other instance, is with the North American Securities Administrators Association, which represents state securities regulators, LPL must pay civil penalties of $1.425 million for lapses regarding the firm’s sale of nontraded real-estate investment trusts.

, including the Financial Regulatory Authority and Securities Exchange Commission, for inadequate disclosure of risks and their high fees, which typically range from 12% to 15% at the time of sale.

LPL is the leading securities firm serving so-called independent investment representatives, who typically own their own local business and sell securities as a financial investor of a separate securities firm. In 2014, the firm spent $36.3 million to settle regulatory charges. These regulatory charges have weighed financially on LPL. They continue to resolve remaining compliance issues, resulting from a period of rapid growth.

As reported by The Wall Street Journal on September 14, 2015, (“The Problem With ETFs”), one of Wall Street’s most popular products –Exchange Traded Funds – faces renewed questions after the wild stock-market gyrations in August exposed cracks that many critics had warned about for months.

Investors have poured hundreds of billions of dollars into ETFs over the past decade, drawn by low fees and the prospect of being able to buy or sell a mutual-fund-like product whenever they want like a stock.

But, according to the article, trading records and conversations with investors show that ETFs couldn’t keep that promise when the Dow Jones Industrial Average dropped more than 1,000 points, in the first minutes of trading on Aug. 24, as “steep share-price declines triggered a slew of trading halts that started in individual stocks and cascaded into ETFs. Dozens of ETFs traded at sharp discounts to the sum of their holdings, worsening losses for many fund holders who sold during the panic. The strange moves highlighted concerns raised by academics and others over the years that ETFs might not be as easy to move in and out of as advertised in times of stress. For investors of all sizes, the problems set off alarms that a core component of their portfolios might not always function as expected.”

This recent market volatility has once again placed a spotlight on the “growing concern about how bond ETFs, a popular niche, will perform if investors rush to the exits, as some predict might happen when U.S. interest rates rise” – what some observers refer to as “a recipe for a breakdown” that could be significant and prolonged.

If you are an individual or institutional investor who has any concerns about ETF investments having been recommended for purchase in either your retirement or non-retirement accounts, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).